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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-9860
BARR LABORATORIES, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 22-1927534
(State or Other Jurisdiction of (I.R.S. - Employer
Incorporation or Organization) Identification No.)
TWO QUAKER ROAD, P. O. BOX 2900, POMONA, NEW YORK 10970-0519
(Address of principal executive offices)
914-362-1100
(Registrant's telephone number)
Securities registered pursuant Name of each exchange on
to Section 12(b) of the Act: which registered:
Title of each class
Common Stock, Par Value $0.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the
Act: None (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the Registrant held by
nonaffiliates was approximately $527,693,496 as of June 30, 1998 (assuming
solely for purposes of this calculation that all Directors and Officers of the
Registrant are "affiliates").
Number of shares of Common Stock, Par Value $.01, outstanding as of June 30,
1998: 22,306,690.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S 1998 ANNUAL REPORT TO SHAREHOLDERS ARE INCORPORATED
BY REFERENCE IN PART II AND PART IV HEREOF. PORTIONS OF THE REGISTRANT'S 1998
PROXY STATEMENT ARE INCORPORATED BY REFERENCE IN PART III HEREOF.
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PART I
ITEM 1. BUSINESS
Barr Laboratories, Inc. ("Barr" or the "Company") is an established
pharmaceutical company engaged in the development, manufacture and marketing of
generic and proprietary prescription pharmaceuticals. The Company was founded in
1970 by Mr. Edwin A. Cohen and a partner, and commenced active business in 1972
as a manufacturer of generic drug products. Barr is listed on the New York Stock
Exchange (NYSE-BRL).
The Company currently markets 70 products, representing various dosage strengths
and product forms of 34 chemical entities. The Company's product line is
concentrated primarily on six core therapeutic categories: oncology, female
healthcare, cardiovascular, anti-infectives, pain management and
psychotherapeutics.
The Company's business strategy has three core components: (i) the development
and marketing of generic pharmaceuticals that have one or more barriers to
entry, (ii) challenging patents protecting select brand pharmaceuticals where
the Company believes that such patents are either invalid, unenforceable or not
infringed by the Company's product, and (iii) the development and introduction
of proprietary pharmaceuticals most of which will have some form of market
exclusivity.
Generic pharmaceuticals represent an increasing proportion of medicines
dispensed in the U.S. In 1996, the U.S. generic pharmaceutical industry had
total U.S. sales of approximately $9 billion. Industry sources also estimate
that pharmaceuticals with 1996 U.S. sales in excess of $6 billion are already
off-patent and have no generic competition. In addition, industry sources
estimate that, through the year ended 2002, branded drugs with 1996 U.S. sales
of approximately $11 billion will lose patent protection. The Company believes
that the market for generic pharmaceuticals will continue to grow, driven by two
primary factors. The first factor is the future commercialization of generic
versions of drugs with patents that (i) have already expired or (ii) will expire
over the next several years. The Company believes a second factor driving growth
will be increasing rates at which generic pharmaceuticals are substituted for
branded drugs.
The marketplace economics that impact the much larger, multi-national
pharmaceutical companies may limit their willingness to provide orphan drug
products or therapies where the patient population is too small to provide a
sufficient return on investment. The Company believes that these areas could
provide an opportunity for limited competition for proprietary products.
Current Products and Supply Agreements
The Company's largest selling product is Tamoxifen Citrate ("Tamoxifen"), the
generic equivalent of Nolvadex(R), which is used to treat advanced breast cancer
as well as impede the recurrence of tumors following surgery. Tamoxifen
accounted for approximately 68%, 76% and 74% of the Company's net product sales
during fiscal 1998, 1997 and 1996, respectively.
In 1993, as a result of a settlement of a patent challenge against the Innovator
of Tamoxifen, the Company entered into a non-exclusive supply and distribution
agreement (the "Tamoxifen Agreement"). Under the terms of the Tamoxifen
Agreement, Barr purchases Tamoxifen directly from the Innovator and sells it as
a generic product. The Company is the only distributor of
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Tamoxifen in the U.S. other than the Innovator. Although it is a non-exclusive
distributor, the Tamoxifen Agreement provides that should an additional
distributor or distributors be selected by the Innovator, Barr will be granted
terms no less favorable than those granted to any subsequent distributor.
Furthermore, the Company has a tentatively approved Abbreviated New Drug
Application ("ANDA") for the manufacture of Tamoxifen. Therefore, at the time of
patent expiration in August 2002 (or should another company's patent challenge
succeed), Barr will be permitted to immediately begin the direct manufacture of
Tamoxifen. Manufacturing Tamoxifen would significantly lower Barr's cost of
goods for this product and the Company believes its profit margins on Tamoxifen
would improve. Within the last 24 months, a court upheld the Tamoxifen patent in
a challenge brought by another generic pharmaceutical company. In addition, the
Company is aware of 2 other challenges currently pending against Tamoxifen.
Although the final outcome of any such litigation is uncertain, to date no other
challenge to Tamoxifen has been successful.
The Company's most significant recent product introduction is Warfarin Sodium,
which was launched by the Company in July 1997. Warfarin Sodium is the generic
equivalent of DuPont Pharmaceutical Company's Coumadin(R), an anti-coagulant
that is given to patients with heart disease and/or high risk of stroke.
Coumadin had U.S. sales of approximately $535 million in 1997. Although another
generic competitor has received an ANDA approval for Warfarin Sodium, Barr is
currently the only company marketing a generic equivalent of Coumadin. The
Company believes that there will be limited generic competition for this product
because of a number of barriers to entry, including difficulty of sourcing raw
material, the need for specialized manufacturing facilities and marketing
barriers created by DuPont Pharmaceutical Company to oppose generic
substitution.
In January 1997, the Company and the Innovator of Ciprofloxacin settled pending
patent litigation. Ciprofloxacin is the generic equivalent of Bayer's Cipro(R),
which is used to treat lower respiratory, skin, bone and joint, and urinary
tract infections. As part of the settlement of the patent challenge, the Company
entered into a contingent, non-exclusive supply agreement (the "Ciprofloxacin
Agreement") which ends with the expiration of the patent in December 2003. Under
the Ciprofloxacin Agreement, the Innovator has the option to make payments to
Barr or to provide Barr with quantities of Ciprofloxacin that Barr would market
as a generic pursuant to a license from the Innovator. If the Innovator chooses
not to provide the product to Barr, Barr would receive quarterly income and cash
flow of $6 million to $8 million throughout the life of the Ciprofloxacin
Agreement. In August, the Company was notified that another challenge was filed
against Ciprofloxacin. Although the timing and final outcome of any such
litigation is uncertain, the Company believes that it will be several years
before any litigation regarding Ciprofloxacin is finally adjudicated.
Product Development
The Company's objective is to utilize its research and development and
manufacturing capabilities to maximize return on shareholder investment. To
achieve this objective, the Company focuses it resources on three core
strategies:
Development and Marketing of Selected Generic (Off-Patent) Pharmaceuticals. The
Company principally pursues the development and marketing of generic
pharmaceuticals that have one or more barriers to entry. The Company rarely
pursues those products where it expects that a significant number of its
competitors will successfully develop a generic product. The Company
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believes products with such barriers will face limited competition and therefore
provide longer product life-cycles and/or higher profitability than commodity
generic products.
Challenging Patents Protecting Certain Brand Pharmaceuticals. The Company
pursues development and marketing of branded pharmaceuticals protected by
patents where the Company believes that such patents are either invalid or not
infringed by the Company's product. This strategy is an extension of the
Company's generic strategy, in that, issued patents, even invalid patents,
present barriers to entry to companies that do not have the capabilities to
assess and challenge the validity of such patents. The Company believes that the
successful development of pharmaceuticals that were perceived by competitors to
be patent protected may offer longer product life-cycles and/or higher
profitability.
Development and Introduction of Proprietary Pharmaceuticals. The Company is
pursuing the development of proprietary pharmaceuticals that may have some
period of exclusivity, typically from three to seven years. The Company believes
that such products will produce higher and more consistent profitability than
the typical generic product. The Company anticipates that the majority of its
proprietary products will be developed with strategic partners and marketed by
those partners through detail product sales forces or other appropriate
channels.
In September, the FDA approved the first product from Barr's proprietary product
development program - a contraceptive co-developed with Gynetics, Inc. The
product, the PREVEN(TM) Emergency Contraceptive Kit, is the first FDA-approved
product specifically designed to prevent pregnancy within 72 hours of
unprotected intercourse. Barr helped to develop and submit the new product
application to the FDA and will manufacture the oral contraceptive tablets that
are part of the PREVEN Kit. Gynetics will be responsible for marketing the
product.
For the fiscal years ended June 30, 1998, 1997, and 1996, total research and
development expenditures were approximately $19 million, $14 million and $11
million, respectively. Management anticipates that research and development
expenditures in fiscal 1999 will exceed comparable expenditures in fiscal 1998.
Marketing and Customers
The Company markets its products to customers in the United States and Puerto
Rico through an integrated sales and marketing force. The activities of the
sales force are supplemented by customer service representatives who inform the
Company's customers of new products, process orders and advise of order status
and current pricing.
The Company's customer base includes drug store chains, food chains, mass
merchandisers, wholesalers, distributors, managed care organizations, mail order
accounts, government/military and repackagers. The Company's products are sold
under the Barr label as well as private labels of several distributors.
The Company has approximately 180 direct purchasing customers and 100 indirect
customers that purchase the Company's products via wholesalers. In fiscal 1998,
1997 and 1996, McKesson Drug Company, the nations largest wholesaler, accounted
for approximately 12%, 13% and 10%, respectively, of net product sales. No other
customer accounted for greater than 10% of sales in any of the last three fiscal
years.
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During the past two years the Company's customer base underwent significant
consolidation, particularly in the chain drug store, distributor and wholesaler
trade classes. To date, this consolidation has had no adverse impact on the
Company's business. The Company believes that it has excellent relationships
with its key customers, but there can be no assurance that continued
consolidation will not impact the Company's business, or that such impact might
not be significant.
Competition
The Company competes in varying degrees with numerous other manufacturers of
pharmaceutical products (both branded and generic). These competitors include
the generic divisions of proprietary pharmaceutical companies (either marketing
units or other generic manufacturers), large independent generic
manufacturers/distributors that seek to provide "one stop shopping" by offering
a full line of products, and generic manufacturers that have targeted select
therapeutic categories and market niches.
The principal competitive factors in the generic pharmaceutical industry are:
- the ability to introduce generic versions of branded products
promptly after the expiration of market exclusivity;
- maintenance of sufficient inventories to ensure timely
deliveries;
- price;
- quality; and
- customer service.
Many of the Company's competitors have greater financial and other resources,
and are therefore able to devote more resources than the Company in such areas
as marketing and product development. In order to ensure its ability to compete
effectively, the Company has:
- focused its product development in areas of historical
strength or competitive advantage;
- targeted products for development that offer significant
barriers to entry for competitors, including: difficulty in
sourcing raw materials; difficulty in formulation or
establishing bioequivalence; manufacturing that requires
unique facilities, processes or expertise; and
- invested in plant and equipment to give it a competitive edge
in manufacturing.
These factors, when combined with the Company's investment in new product
development and its focus on select therapeutic categories, provide the basis
for its belief that it will continue to remain a leading independent generic
pharmaceutical company.
Raw Materials
The active chemical raw materials essential to the Company's business are bulk
pharmaceutical chemicals, which are purchased from numerous manufacturers in the
U.S. and throughout the world. All purchases are made in United States dollars,
and therefore, while currency fluctuations do not have an immediate impact on
prices the Company pays, such fluctuations may, over time, have an effect on
prices to the Company. In addition, because prior U.S. Food
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and Drug Administration ("FDA") approval of raw material suppliers is required,
if raw materials from an approved supplier were to become unavailable, the
required FDA approval of a new supplier could cause a significant delay in the
manufacture of the drug product affected. However, in some cases, the Company
has a FDA approved alternate supplier which would mitigate the effect of any
such delay. To date, the Company has not experienced any significant delays from
lack of raw material availability. However, there can be no assurance that
significant delays will not occur in the future.
Employees
As of June 30, 1998, the Company had approximately 557 full-time employees. Of
these, approximately one-quarter are represented by a union that has a
collective bargaining agreement with the Company. The Company's current
collective bargaining agreement with its employees, who are represented by Local
8-149 of the Oil, Chemical and Atomic Workers International Union ("OCAW"),
expires on April 1, 2001.
GOVERNMENT REGULATION
All pharmaceutical manufacturers, including the Company, are subject to
extensive regulation by the federal government, principally by the FDA, and, to
a lesser extent, by the U.S. Drug Enforcement Administration ("DEA") and state
governments. The Federal Food, Drug and Cosmetic Act, the Controlled Substances
Act and other federal statutes and regulations govern or influence the testing,
manufacturing, safety, labeling, storage, record keeping, approval, pricing,
advertising and promotion of the Company's products. Non-compliance with
applicable requirements can result in fines, recalls and seizure of products.
Under certain circumstances, the FDA also has the authority to revoke drug
approvals previously granted.
ANDA Process
FDA approval is required before a generic equivalent to a previously approved
drug or a new dosage form of an existing drug can be marketed. The Company
usually receives approval for such products by submitting an ANDA to the FDA.
When processing an ANDA, the FDA waives the requirement of conducting complete
clinical studies, although it may require bioavailability and/or bioequivalence
studies. "Bioavailability" indicates the rate and extent of absorption and
levels of concentration of a drug product in the blood stream needed to produce
a therapeutic effect. "Bioequivalence" compares the bioavailability of one drug
product with another, and when established, indicates that the rate of
absorption and levels of concentration of a generic drug in the body are
substantially equivalent to the previously approved drug. An ANDA may be
submitted for a drug on the basis that it is the equivalent to a previously
approved drug or, in the case of a new dosage form, is suitable for use for the
indications specified.
Among the requirements for drug approval by the FDA is that the Company's
manufacturing procedures and operations conform to current Good Manufacturing
Practices ("cGMP"), as defined in the U.S. Code of Federal Regulations. The cGMP
regulations must be followed at all times during the manufacture of
pharmaceutical products. In complying with the standards set forth in the cGMP
regulations, the Company must continue to expend time, money and effort in the
areas of production and quality control to ensure full technical compliance.
If the FDA believes a company is not in compliance with cGMP, certain sanctions
are imposed upon that company including (i) withholding from the company new
drug approvals as well as
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approvals for supplemental changes to existing applications; (ii) preventing the
company from receiving the necessary export licenses to export its products; and
(iii) classifying the company as an "unacceptable supplier" and thereby
disqualifying the company from selling products to federal agencies. The Company
believes it is currently in compliance with cGMP.
In May of 1992, the Generic Drug Act of 1992 (the "Act") was enacted. The Act, a
result of the legislative hearings and investigations into the generic drug
approval process, allows the FDA to impose debarment and other penalties on
individuals and companies that commit certain illegal acts relating to the
generic drug approval process. In some situations, the Act requires the FDA to
debar (i.e., not accept or review ANDAs for a period of time) a company or an
individual that has committed certain violations. It also provides for temporary
denial of approval of applications during the investigation of certain
violations that could lead to debarment and also, in more limited circumstances,
provides for the suspension of the marketing of approved drugs by the affected
company. Lastly, the Act allows for civil penalties and withdrawal of previously
approved applications. Neither the Company nor any of its employees have ever
been subject to debarment.
NDA Process
FDA approval is required before any new drug can be marketed. A New Drug
Application ("NDA") is a filing submitted to the FDA to obtain approval of a
drug not eligible for an ANDA and must contain complete pre-clinical and
clinical safety and efficacy data or a right of reference to such data. Before
dosing a new drug in healthy human subjects or patients may begin, stringent
government requirements for pre-clinical data must be satisfied. The
pre-clinical data must provide an adequate basis for evaluating both the safety
and the scientific rationale for the initiation of clinical trials.
Clinical trials are typically conducted in three sequential phases, although the
phases may overlap. Data from pre-clinical testing and clinical trials are
submitted to the FDA as a NDA for marketing approval and to other health
authorities as a marketing authorization application. The process of completing
clinical trials for a new drug may take several years and require the
expenditure of substantial resources. Preparing a NDA or marketing authorization
application involves considerable data collection, verification, analysis and
expense, and there can be no assurance that approval from the FDA or any other
health authority will be granted on a timely basis, if at all. The approval
process is affected by a number of factors, primarily the risks and benefits
demonstrated in clinical trials as well as the severity of the disease and the
availability of alternative treatments. The FDA or other health authorities may
deny a NDA or marketing authorization application if the regulatory criteria are
not satisfied, or such authorities may require additional testing or
information.
Even after initial FDA or other health authority approval has been obtained,
further studies may be required to provide additional data on safety and will be
required to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested.
Additionally, the FDA regulates post-approval promotional labeling and
advertising activities to assure that such activities are being conducted in
conformity with statutory and regulatory requirements.
DEA
Because the Company markets some and intends to introduce or reintroduce a wide
range of controlled substances in its analgesic and psychotherapeutic product
lines, it must meet the
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requirements of the Controlled Substances Act and the regulations issued
thereunder and administered by the DEA. These regulations include stringent
requirements for manufacturing controls and security to prevent diversion of or
unauthorized access to the drugs in each stage of the production and
distribution process. The DEA monitors allocation to the Company of raw
materials used in the production of controlled substances based on historical
sales data. The Company believes it is currently in compliance with all
applicable DEA requirements.
Government Relations Activities
During the past two years, the branded pharmaceutical industry has increased its
efforts to utilize state and federal legislative and regulatory forums to delay
generic competition, or limit the severe market erosion they can experience
which occurs once monopoly protection is lost for the branded product. To
achieve these goals, the brand pharmaceutical companies have attempted to use
the Citizen Petition process (i.e. petition directly to the FDA) to request
amendments to FDA standards, sought changes in United States Pharmacopeia
requirements, and sought to attach patent extension amendments to important
federal legislation. Another anti-generic defense strategy involves
state-by-state initiatives to enact legislation that would impose restrictions
on the substitution of equivalent generic drugs. Using such terminology as
narrow therapeutic index and "critical care" to define subcategories of drug
products, the brand industry is attempting to erroneously suggest that there are
clinical differences between brand and generic products that require additional
attention by the prescribing physician or limits on substitution. Since January
1997, Barr has engaged the resources necessary to fight proposed legislation in
a number of major states.
Because this issue is critical to Barr's continued success, the Company has and
will continue to put a major emphasis in terms of management time and financial
resources on government affairs activities.
Patents
The Process Patent Amendments Act of 1988 provides that the use or sale within
the United States, or importation into the United States, of a product that was
made either domestically or abroad by a process covered by a United States
patent, constitutes infringement of the process patent. After proper notice,
this legislation could subject the Company to potential patent infringement
claims if a supplier of an active ingredient to the Company were to infringe a
United States process patent in the manufacture of such ingredient. The Company
has received no such notice.
Medicaid
In November 1990, a law regarding reimbursement for prescribed Medicaid drugs
was passed as part of the Congressional Omnibus Budget Reconciliation Act of
1990. This law basically required drug manufacturers to enter into a rebate
contract with the Federal Government. All generic pharmaceutical manufacturers,
whose products are covered by the Medicaid program, are required to rebate to
each state a percentage (currently 11% in the case of products manufactured by
the Company and 15% for Tamoxifen sold by the Company) of their average net
sales price for the products in question. The Company provides an accrual for
future estimated rebates in its consolidated financial statements.
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Effect of the General Agreement on Tariffs and Trade ("GATT")
With the signing of the GATT accord in December 1994, one of the provisions
called for harmonization of patent life throughout GATT countries. U.S. enabling
legislation had provisions that in effect offered a limited extension of the
period of monopoly protection for intellectual property including patents. While
a number of patented drugs will receive extended patent protection (the maximum
extension being 36 months) as a result of this enabling legislation, the patent
extensions resulting from the implementation of GATT are not expected to
materially impact any of the product candidates in Barr's current pipeline.
Other
The Company is also governed by federal, state and local laws of general
applicability, such as laws regulating working conditions, equal employment
opportunity, and environmental protection.
ITEM 2. PROPERTIES
Barr has facilities and operations in Pomona and Blauvelt, New York; Northvale,
New Jersey; and Forest, Virginia. The following table presents the facilities
owned or leased by the Company and indicates the location and type of each of
these facilities.
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE STATUS DESCRIPTION
- -------- ------- ------ -----------
<S> <C> <C> <C>
NEW JERSEY
Northvale 26,500 Owned Manufacturing
Northvale 57,000 Leased Warehouse
NEW YORK
Blauvelt 50,000 Leased Corporate Administration
Pomona 1 33,000 Owned R&D Laboratories, Manufacturing
Pomona 2 44,000 Owned Laboratories, Administrative
Offices, Manufacturing
VIRGINIA
Forest 168,000 Owned Administrative Offices,
Manufacturing, Warehouse,
Packaging, Distribution
</TABLE>
Over the past three fiscal years, the Company has spent approximately $72
million in capital expenditures to expand manufacturing capacity and strengthen
certain competitive advantages.
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ITEM 3. LEGAL PROCEEDINGS
Fluoxetine Hydrochloride Patent Challenge
In February 1996, Barr filed an ANDA seeking approval from the FDA to market
fluoxetine hydrochloride ("Fluoxetine"), the generic equivalent of Eli Lilly
Company's ("Lilly") Prozac(R). The Company notified Lilly pursuant to the
provisions of the Waxman-Hatch Act, and, on April 19, 1996, Lilly filed a patent
infringement action in the United States District Court for the Southern
District of Indiana - Indianapolis Division seeking to prevent Barr from
marketing Fluoxetine until certain U.S. patents expire in 2003. The Company is
pursuing this case vigorously and a trial date has been set for January 1999.
Invamed, Inc. Lawsuit
On February 25, 1998, Invamed, Inc. ("Invamed") named the Company and several
others as defendants in a lawsuit filed in the United States District Court for
the Southern District of New York, charging that the Company unlawfully blocked
access to the raw material source for Warfarin Sodium. The Company believes that
the suit filed against it by Invamed is without merit and intends to defend its
position vigorously. This action is currently in discovery stage. It is
anticipated that this matter will take several years to be resolved but an
adverse judgement could have a material adverse impact on the Company's
consolidated financial statements.
DuPont Anti-Trust Suit
On March 9, 1998, the Company filed an anti-trust suit against DuPont Merck
Pharmaceutical Company ("DuPont Merck") in the United States District Court for
the Southern District of New York, charging that DuPont Merck has acted
unlawfully to impede the marketplace acceptance of Barr's generic version of the
anti-coagulant Coumadin. The Company's suit charges that DuPont Merck's actions
violated federal anti-trust laws, as well as the Lanham Act and the New York
Deceptive Acts and Practices Act. The Company intends to prosecute this case
vigorously.
Miscellaneous
As of June 30, 1998, the Company was involved, as plaintiff and defendant, in
other lawsuits incidental to its business. Management of the Company, based on
the advice of legal counsel, believes that the disposition of such litigation
will not have any significant adverse effect on the Company's consolidated
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by Item 5 is included on page 42 of the 1998 Annual
Report to Shareholders ("Annual Report") and is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is included on page 44 of the Annual Report
and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by Item 7 is included on pages 23 through 27 of the
Annual Report and is incorporated herein by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for a change in interest rates relates
primarily to the Company's investment portfolio of $80 million and debt
instruments of $37 million. The Company does not use derivative financial
instruments.
The Company's investment portfolio consists of cash and cash equivalents and
marketable securities classified as "available for sale". The primary objective
of the Company's investment activities is to preserve principal while at the
same time maximizing yields without significantly increasing risk. To achieve
this objective, the Company maintains its portfolio in a variety of high credit
quality securities, including U.S. government and corporate obligations,
certificates of deposit and money market funds. Approximately 91% of the
Company's portfolio matures in less than three months and the remaining 9%
matures in less than one year. The carrying value of the investment portfolio
approximates the market value at June 30, 1998. Because the Company's
investments are diversified and are of relatively short maturity, a hypothetical
10% change in interest rates would not have a material effect on the Company's
consolidated financial statements.
Approximately 82% of the Company's debt instruments at June 30, 1998 are subject
to fixed interest rates and principal payments. The related note purchase
agreements permit the Company to prepay these notes prior to their scheduled
maturity, but would require the Company to pay a prepayment fee based on current
market rates and the note rates. The remaining 18% of debt instruments are
primarily subject to variable interest rates based on LIBOR and have fixed
principal payments. The fair value of all debt instruments is approximately $34
million at June 30, 1998. Management does not believe that any risk inherent in
the variable-rate nature of these instruments is likely to have a material
effect on the Company's consolidated financial statements.
The Company's $20 million Unsecured Revolving Credit Facility ("Revolver") has
an interest rate based on the prime rate or LIBOR plus 0.75, at the Company's
option. The Company currently maintains a zero balance on the Revolver (at June
30, 1998, the outstanding balance
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was $2.5 million). If the Company were to draw down on the line prior to its
expiration in July 2000, and an unpredicted increase in both alternate rates
occurred, it would not be likely to have a material effect on the Company's
consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is included on pages 28 through 43 of the
Annual Report and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Bruce L. Downey 50 Chairman of the Board, Chief Executive
Officer and President
Paul M. Bisaro 37 Senior Vice President, Strategic Business
Development, General Counsel and Secretary
Timothy P. Catlett 43 Senior Vice President, Sales and Marketing
Mary E. Petit 49 Senior Vice President, Operations
Salah U. Ahmed 44 Vice President, Product Development
Ezzeldin A. Hamza 47 Vice President, Research and Development
Catherine F. Higgins 46 Vice President, Human Resources
William T. McKee 37 Vice President, Chief Financial Officer
and Treasurer
Gerald F. Price 51 Vice President, Manufacturing and
Engineering
</TABLE>
BRUCE L. DOWNEY became the Company's President, Chief Operating Officer
and a member of the Board of Directors in January 1993 and was elected Chairman
of the Board and Chief Executive Officer in February of 1994. Prior to assuming
these positions, from 1981 to 1993, Mr. Downey was a partner in the law firm of
Winston & Strawn and a predecessor firm of Bishop, Cook, Purcell and Reynolds.
Mr. Downey is also a director of Warner Chilcott plc. (NASDAQ).
PAUL M. BISARO became the Company's General Counsel in July 1992, was
elected Secretary of the Company in September 1992 and elected a Vice President
in 1993. In August 1994, Mr. Bisaro was elected to the position of Chief
Financial Officer. In September 1996, Mr. Bisaro was elected to the position of
Senior Vice President-Strategic Business Development. In June 1998, Mr. Bisaro
was elected to the Company's Board of Directors. Prior to assuming these
positions with the Company, he was associated with the law firm of Winston &
Strawn and a predecessor firm, Bishop, Cook, Purcell and Reynolds. Prior to his
association with Winston & Strawn, Mr. Bisaro was a Consultant with Arthur
Anderson & Co.
TIMOTHY P. CATLETT was employed by the Company in February 1995 as Vice
President, Sales and Marketing. In September 1997, Mr. Catlett was elected to
Senior
13
<PAGE> 14
Vice President of Sales and Marketing. From 1978 through 1993, Mr. Catlett held
a number of positions with the Lederle Laboratories division of American
Cyanamid including Vice President, Cardiovascular Marketing.
MARY E. PETIT was employed by the Company in January 1995 as Vice
President, Quality. In September 1996, Dr. Petit was elected to the position of
Senior Vice President-Operations. From June 1992 to January 1995, Dr. Petit was
Vice President, Quality Management with the Lederle Laboratories division of
American Cyanamid. Dr. Petit held positions of increasing responsibility during
her 12 year tenure with Lederle.
SALAH U. AHMED was employed by the Company as Director of Research and
Development in 1993. Dr. Ahmed was named Vice President, Product Development in
September 1996. Before joining Barr, Dr. Ahmed was a Senior Scientist with
Forest Laboratories, Inc. from 1989 to 1993.
EZZELDIN A. HAMZA was employed by the Company in July 1984 as Director
of Quality Control and thereafter, from August 1987, served as Director of
Scientific Affairs. In December 1988, Mr. Hamza was elected to the position of
Vice President-Technical Affairs. In 1993, he was elected Vice
President-Research and Development.
CATHERINE F. HIGGINS was employed by the Company in January 1992 as
Vice President-Human Resources and was elected an officer in September 1992.
From June 1985 to December 1991, Ms. Higgins served as Vice President-Human
Resources for Inspiration Resources Corporation.
WILLIAM T. MCKEE was employed by the Company in January 1995 as
Director of Finance and was appointed Treasurer in March 1995. In September 1996
Mr. McKee was elected to the position of Chief Financial Officer, and in
December 1997 Mr. McKee was elected Vice President. Prior to joining the
Company, Mr. McKee served as Vice President-Finance for Absolute Entertainment
Inc. From September 1983 through June 1993, Mr. McKee held management positions
in the accounting firms of Deloitte & Touche LLP and Gramkow & Carnevale, CPAs.
Mr. McKee is a C.P.A.
GERALD F. PRICE was employed by the Company in January 1990 as Vice
President, Manufacturing and Engineering. He was elected an officer of the
Company in January 1990. Prior to assuming these positions, he served as Group
Vice President-Operations of Del Laboratories.
The Company's directors and executive officers are elected annually to serve
until the next annual meeting or until their successors have been elected and
qualified. The directors of the Company and their business experience are set
forth in the section headed "Information on Nominees" of the Company's Notice of
Annual Meeting of Shareholders, dated October 22, 1998 (the "Proxy Statement")
and are incorporated herein by reference.
14
<PAGE> 15
ITEM 11. EXECUTIVE COMPENSATION
A description of the compensation of the Company's executive officers is set
forth in the sections headed "Executive Compensation", "Option Grants", "Option
Exercises and Option Values" and "Executive Agreements" of the Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A description of the security ownership of certain beneficial owners and
management is set forth in the sections headed "Ownership of Securities" and
"Changes in Control" of the Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A description of certain relationships and related transactions is set forth in
the section headed "Certain Relationships and Related Transactions" of the Proxy
Statement and is incorporated herein by reference.
15
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statement Schedules:
The consolidated balance sheets as of June 30, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended June 30,
1998 and the related notes to the consolidated financial statements,
together with the Independent Auditors' Report, are incorporated herein
by reference. With the exception of the aforementioned information and
the information incorporated by reference in Items 5 through 8, the
Annual Report is not deemed filed as part of this report. The following
additional financial data should be read in conjunction with the
financial statements in the Annual Report. All other schedules are
omitted because they are not applicable or the required information is
shown in the consolidated financial statements or notes.
Page
Independent Auditors' Report 20
Financial Statement Schedule:
II Valuation and Qualifying Accounts 21
Exhibits
3.1 Restated Certificate of Incorporation of the Registrant
3.2 Amended and Restated By-Laws of the Registrant(1)
4.1 Loan and Security Agreement dated April 12, 1996 (9)
4.2 Amended and Restated Loan Agreement dated November 18, 1997 (9)
4.3 Note Purchase Agreements dated November 18, 1997 (1)
10.1 Stock Option Plan (3)
10.2 Savings and Retirement Plan (8)
10.3 Economic Development Bond Financing Agreement, dated December 19, 1984,
relating to 265 Livingston Street (2)
10.6 Collective Bargaining Agreement, effective April 1, 1996 (4)
10.7 Agreement with Bruce L. Downey (4)
10.8 Agreement with Ezzeldin A. Hamza (4)
16
<PAGE> 17
10.9 Distribution and Supply Agreement for Tamoxifen Citrate dated March
8, 1993 (4)
10.10 1993 Stock Incentive Plan (5)
10.11 1993 Employee Stock Purchase Plan (6)
10.12 1993 Stock Option Plan for Non-Employee Directors (7)
10.13 Agreement with Edwin A. Cohen and Amendment thereto (8)
10.14 Distribution and Supply Agreement for Ciprofloxacin Hydrochloride
dated January 1997 (10)
13.0 1998 Annual Report to Shareholders
21.0 Subsidiaries of the Company (11)
23.0 Consent of Deloitte & Touche LLP
27.0 Financial Data Schedule
(1) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1986 and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Registration Statement on Form S-1 No.
33-13472 and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1993 and incorporated herein by reference.
(5) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Registration Statement on Form S-8 Nos.
33-73696 and 333-17349 and incorporated herein by reference.
(6) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Registration Statement on Form S-8 No.
33-73700 and incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Registration Statement on Form S-8 Nos.
33-73698 and 333-17351 incorporated herein by reference.
17
<PAGE> 18
(8) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1995 and incorporated herein by reference.
(9) The Registrant agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of any instrument defining the rights
of the holders of its long-term debt wherein the total amount of
securities authorized thereunder does not exceed 10% of the total
assets of the Registrant and its subsidiaries on a consolidated basis.
(10) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997 and incorporated herein by reference.
(11) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1988 and incorporated herein by reference.
(b) Reports on Form 8-K
None.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BARR LABORATORIES, INC.
Signature Title Date
BY BRUCE L. DOWNEY Chairman of the Board, September 9, 1998
(Bruce L. Downey) Chief Executive Officer & President
BY WILLIAM T. MCKEE Vice President, Chief September 9, 1998
(William T. McKee) Financial Officer & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
BRUCE L. DOWNEY Chairman of the Board, September 9, 1998
(Bruce L. Downey) Chief Executive Officer &
President
EDWIN A. COHEN Vice Chairman of the Board September 9, 1998
(Edwin A. Cohen)
PAUL M. BISARO Director September 9, 1998
(Paul M. Bisaro)
ROBERT J. BOLGER Director September 9, 1998
(Robert J. Bolger)
MICHAEL F. FLORENCE Director September 9, 1998
(Michael F. Florence)
JACOB M. KAY Director September 9, 1998
(Jacob M. Kay)
BERNARD C. SHERMAN Director September 9, 1998
(Bernard C. Sherman)
GEORGE P. STEPHAN Director September 9, 1998
(George P. Stephan)
19
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Barr Laboratories, Inc.:
We have audited the financial statements of Barr Laboratories, Inc. and
subsidiaries (the "Company") as of June 30, 1998 and 1997, and for each of the
three years in the period ended June 30, 1998, and have issued our report
thereon dated August 19, 1998; such financial statements and report are included
in your June 30, 1998 Annual Report to Shareholders and are incorporated herein
by reference. Our audits also included the financial statement schedule of Barr
Laboratories, Inc., listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
August 19, 1998
20
<PAGE> 21
SCHEDULE II
BARR LABORATORIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS, RECOVERY
BEGINNING OF COSTS AND AGAINST DEDUCTIONS, BALANCE AT
YEAR EXPENSE WRITE-OFFS WRITE-OFFS END OF YEAR
---- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended June 30, 1996 $ 400 $ 95 $ 2 $ 305 $ 192
Year ended June 30, 1997 192 735 22 679 270
Year ended June 30, 1998 270 180 1 189 262
Reserve for returns and allowances:
Year ended June 30, 1996 1,700 5,114 -- 5,207 1,607
Year ended June 30, 1997 1,607 5,105 -- 5,362 1,350
Year ended June 30, 1998 1,350 5,003 -- 3,877 2,476
Inventory reserves:
Year ended June 30, 1996 3,550 2,359 -- 4,630 1,279
Year ended June 30, 1997 1,279 5,334 -- 2,978 3,635
Year ended June 30, 1998 3,635 8,043 -- 6,103 5,575
</TABLE>
21
<PAGE> 22
Exhibit Index
Exhibits Description
- -------- -----------
3.1 Restated Certificate of Incorporation of the Registrant
3.2 Amended and Restated By-Laws of the Registrant(1)
4.1 Loan and Security Agreement dated April 12, 1996 (9)
4.2 Amended and Restated Loan Agreement dated November 18, 1997 (9)
4.3 Note Purchase Agreements dated November 18, 1997 (1)
10.1 Stock Option Plan (3)
10.2 Savings and Retirement Plan (8)
10.3 Economic Development Bond Financing Agreement, dated December 19, 1984,
relating to 265 Livingston Street (2)
10.6 Collective Bargaining Agreement, effective April 1, 1996 (4)
10.7 Agreement with Bruce L. Downey (4)
10.8 Agreement with Ezzeldin A. Hamza (4)
10.9 Distribution and Supply Agreement for Tamoxifen Citrate dated March
8, 1993 (4)
10.10 1993 Stock Incentive Plan (5)
10.11 1993 Employee Stock Purchase Plan (6)
10.12 1993 Stock Option Plan for Non-Employee Directors (7)
10.13 Agreement with Edwin A. Cohen and Amendment thereto (8)
10.14 Distribution and Supply Agreement for Ciprofloxacin Hydrochloride
dated January 1997 (10)
13.0 1998 Annual Report to Shareholders
21.0 Subsidiaries of the Company (11)
23.0 Consent of Deloitte & Touche LLP
27.0 Financial Data Schedule
(1) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1986 and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Registration Statement on Form S-1 No.
33-13472 and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1993 and incorporated herein by reference.
(5) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Registration Statement on Form S-8 Nos.
33-73696 and 333-17349 and incorporated herein by reference.
(6) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Registration Statement on Form S-8 No.
33-73700 and incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Registration Statement on Form S-8 Nos.
33-73698 and 333-17351 incorporated herein by reference.
(8) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1995 and incorporated herein by reference.
(9) The Registrant agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of any instrument defining the rights
of the holders of its long-term debt wherein the total amount of
securities authorized thereunder does not exceed 10% of the total
assets of the Registrant and its subsidiaries on a consolidated basis.
(10) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997 and incorporated herein by reference.
(11) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1988 and incorporated herein by reference.
<PAGE> 1
Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
OF
BARR LABORATORIES, INC.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
WE, THE UNDERSIGNED, Bruce L. Downey and Paul M. Bisaro, being
respectively the president and the secretary of Barr Laboratories, Inc., hereby
certify that:
1. The name of the corporation is Barr Laboratories, Inc.
2. The Certificate of Incorporation of said corporation was filed by
the Department of State on 6th day of May, 1970.
3. (a) The Certificate of incorporation is amended to decrease the
number of shares of Cumulative Convertible Preferred Stock, Series A, which the
corporation shall have authority to issue from 1,000,000 to zero. Since none of
such 1,000,000 shares are outstanding, all of them shall resume the status which
they had prior to being designated as shares of Series A. Preferred Stock, i.e.,
part of the class of 2,000,000 shares of preferred stock, par value $1.00 per
share, which the Board of Directors has authority, without shareholder approval,
to issue in one or more series and to determine the number of shares of any such
series and the designation, relative rights, preferences and limitations
thereof.
(b) To effect the foregoing, Article Fourth of the certificate of
incorporation is hereby amended by deleting therefrom the portion thereof
captioned "Section 1 - Series A Preferred Stock" and the text of paragraphs (a)
through (h) thereunder.
4. The amendment of the certificate of incorporation was authorized by
the majority vote of the board of directors at a meeting duly called and held on
June 24, 1998.
IT WITNESS WHEREOF, we have signed this certificate on the 24th day of
June, 1998 and we affirm the statements contained therein as true under
penalties of perjury.
BRUCE L. DOWNEY
--------------------------
Bruce L. Downey, President
PAUL M. BISARO
-------------------------
Paul M. Bisaro, Secretary
<PAGE> 1
EXHIBIT 13
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal 1998 to Fiscal 1997 (thousands of dollars)
<TABLE>
<CAPTION>
Year Ended
June 30,
1998 1997 Change
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Net product sales:
Distributed................ $241,996 $195,734 $46,262
Manufactured............... 104,642 61,702 42,940
------------ ------------- ------------
Total net product sales... 346,638 257,436 89,202
Proceeds from supply
agreements................ 30,666 27,050 3,616
------------ ------------- ------------
Total revenues............... $377,304 $284,486 $92,818
</TABLE>
Total revenues increased approximately 33% to $377,304 from $284,486. The
increase is the result of increased net product sales and proceeds from supply
agreements.
Net product sales increased 35% to $346,638 from $257,436. The increase is
attributable to an increase in both distributed products and manufactured
products. The distributed product sales increase was fueled by increases in
demand for Tamoxifen and sales of Minocycline, which the Company began
distributing in October 1997. Manufactured sales growth was primarily
attributable to sales of Warfarin Sodium, which was launched in July 1997.
Distributed sales increased 24% to $241,996 or 70% of net product sales from
$195,734 or 76% of net product sales. The increase is primarily attributable to
increased sales of Tamoxifen, the result of an expanding Tamoxifen market as
well as an increased market share for Barr's Tamoxifen. Increased demand for the
20mg strength of Tamoxifen, which the Company began distributing in December
1996, and sales of Minocycline, which the Company began distributing in October
1997, also contributed to the increase. Tamoxifen is a patent protected product
manufactured for the Company by the Innovator, and is distributed by the Company
under a non-exclusive license agreement with the Innovator. Currently, Tamoxifen
only competes against the Innovator's products, which are sold under the brand
name.
Sales of manufactured products increased 70%, primarily attributable to sales of
Warfarin Sodium, which the Company launched in July 1997. Manufactured sales
include revenues from eight new products in fiscal 1998 compared to four new
products in fiscal 1997. These products represented approximately 42% and 11% of
total manufactured sales in fiscal 1998 and 1997, respectively. Revenues from
these products more than offset price declines and higher discounts on certain
existing products. Warfarin Sodium accounted for approximately 11% of the
Company's net product sales in fiscal 1998. No other manufactured product
accounted for 10% or more of net product sales.
22
<PAGE> 2
Proceeds from supply agreements increased 13% to $30,666 primarily as a result
of $4,500 received under a separate contingent supply agreement related to the
Ciprofloxacin patent challenge (See Note 2 to the Consolidated Financial
Statements).
Cost of sales increased to $266,002 from $217,196 primarily related to an
increase in net product sales. As a percentage of net product sales, cost of
sales declined from 84% to 77%. This percentage decline was attributable to a
more favorable mix of manufactured products to distributed products. This
improved mix was attributable to the launch of new manufactured products,
primarily, Warfarin Sodium, which have higher margins than distributed products
and other existing products.
As the product line matures and competition from other manufacturers
intensifies, selling prices and the related margins on those products typically
decline. The Company's future operating results are dependent on several factors
including its ability to introduce new products to its product line, customer
purchasing practices and changes in the amount of competition affecting the
Company's products. In addition, the ability to receive sufficient quantities of
raw materials to maintain its production is critical. While the Company has not
experienced any interruption in sales due to lack of raw materials, the Company
is continually identifying alternate raw material suppliers for many of its key
products in the event that raw material shortages were to occur.
Selling, general and administrative expenses increased to $38,990 from $23,391.
The largest components of the increase related to legal and government affairs
activities as well as higher expenses in promotions, advertising and clinical
trial costs associated with the launching of Warfarin Sodium. The increased
legal fees resulted primarily from lower reimbursements received from patent
challenge partners; the prior year reflected approximately $4,600 in
reimbursement of legal fees. Government affairs expenses were higher in the
current year due to the Company's activities directed at countering DuPont
Pharmaceutical Company's continuing anti-competitive efforts to restrict
substitution of Warfarin Sodium.
Research and development expenses increased to $18,955 from $13,536. The
increase is the result of increased personnel costs to support the number of
products in development; higher raw material and outside clinical study costs
including costs associated with the Company's proprietary drug program which was
not in place in the prior year; and a strategic investment of more than $600,
which was allocated to in-process research and development, for six Abbreviated
New Drug Applications and related technologies.
Interest income decreased by $222 in comparison to the prior year. The decrease
is due to the decrease in the average cash and cash equivalents balance as well
as a slight decrease in the market rates of the Company's short-term
investments. The Company expects its interest income to increase in fiscal 1999
due to higher average cash and cash equivalents balances.
Interest expense decreased $81 due to an increase in capitalized interest
associated with the facility expansion projects during the fiscal year. The
increase in capitalized interest was partially offset by higher fees paid on the
unsecured Tamoxifen balance (See Note 1 to the Consolidated Financial
Statements). The Company expects its interest expense to increase in fiscal 1999
due to a lower portion of the expense being capitalized and an increase in the
unsecured Tamoxifen balance associated with increased Tamoxifen purchases.
23
<PAGE> 3
In fiscal 1998, the Company incurred an extraordinary loss of $790 on the early
extinguishment of debt (See Note 6 to the Consolidated Financial Statements).
Results of Operations
Fiscal 1997 to Fiscal 1996 (thousands of dollars)
<TABLE>
<CAPTION>
Year Ended
June 30,
1997 1996 Change
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Net product sales:
Distributed................ $195,734 $171,401 $24,333
Manufactured............... 61,702 60,823 879
------------ ------------- ------------
Total net product sales... 257,436 232,224 25,212
Proceeds from supply
agreement ................ 27,050 -- 27,050
------------ ------------- ------------
Total revenues............... $284,486 $232,224 $52,262
</TABLE>
Total revenues increased approximately 23% to $284,486 from $232,224. The
increase was equally attributable to increasing net product sales and earnings
from the contingent non-exclusive Supply Agreement that resulted from the
successful settlement of the Ciprofloxacin patent challenge in January 1997 (See
Note 2 to the Consolidated Financial Statements).
Net product sales increased 11% to $257,436 from $232,224. The increase is
primarily attributable to a continued increase in demand for Tamoxifen as well
as increased sales for the balance of the Company's product line.
Net Tamoxifen sales increased 14% to $195,734 or 76% of net product sales from
$171,401 or 74% of net product sales. The growth is primarily attributable to
increases in the Company's market share and price.
Net sales of manufactured products increased approximately 2%. Manufactured net
sales include revenues from four new products in fiscal 1997 compared to two new
products in fiscal 1996. These products represented 11% and 4% of total
manufactured sales in 1997 and 1996, respectively. Revenues from these products
and volume increases on the Company's existing product line offset price
declines and higher discounts on certain existing products.
Cost of sales increased to $217,196 or 84% of net product sales from $189,394 or
82%. The increase in cost of sales as a percentage of net product sales is
primarily the result of two factors. First, an increase in Tamoxifen's share of
total Company revenues, and second, an increase in sales discounts and
allowances due to increased competition. The increase in Tamoxifen's portion of
net product sales negatively impacts margins because the profit margin the
Company earns as a distributor is generally below the margin it earns as a
manufacturer. Increased sales discounts and allowances reduce the Company's net
selling price and margins, but are offered by the Company to maintain market
share in light of increased competition.
24
<PAGE> 4
New products such as Megestrol Acetate and Danazol, which were introduced in
November 1995 and August 1996, respectively, as well as Medroxyprogesterone and
Meperidine which were introduced in the quarter ended December 31, 1996, are
currently subject to less competition and therefore generate margins which help
to offset the declining margins on the Company's established products.
Selling, general and administrative expenses increased to $23,391 from $21,695,
yet decreased as a percentage of net product sales from 9.3% to 9.1%. This
percentage decrease was expected due to increased net product sales. The
majority of the dollar increase is attributable to increases in expenses in
preparation for the July launch of Warfarin Sodium and government affairs
expenses, offset by approximately $4,600 of reimbursed legal fees, primarily
related to the Ciprofloxacin patent challenge.
Research and development expenses increased to $13,536 from $11,274. The
increase is primarily the result of increased salaries and related costs
associated with the addition of scientists and higher outside consulting costs
necessary to support the number of products in development. These increases were
partially offset by a decrease in outside testing services.
Interest income decreased by $380 in comparison to the prior year. The decrease
is primarily the result of $485 in interest income included in the prior year's
amount in connection with interest earned on an income tax refund from the
Internal Revenue Service. The decrease was partially offset by an increased
return earned by the Company on its investments in the current fiscal year.
Interest expense decreased $828 due to an increase in capitalized interest
associated with an increase in capital improvements as compared to the prior
year. The increase in capitalized interest was partially offset by interest on
the Company's equipment financing agreement entered in April 1996 and the fee
paid on the unsecured Tamoxifen balance.
Liquidity and Capital Resources
The Company's cash and cash equivalents balance increased to $72,956 at June 30,
1998 from $31,923 at June 30, 1997. In connection with an Alternative Collateral
Agreement between the Company and the Innovator of Tamoxifen (see Note 1 to the
Consolidated Financial Statements), the Company has continued to increase the
cash held in its interest bearing cash collateral account from $11,239 at June
30, 1997 to $59,321 at June 30, 1998.
Cash provided by operating activities was $33,002 for the year ended June 30,
1998, as net earnings of $32,720 and higher depreciation offset increases in
working capital. The working capital increase was led by increases in inventory
and accounts receivable which were partially offset by increases in accounts
payable. The increase in accounts receivable was attributable to increased sales
and an increase in the receivable related to the proceeds from supply agreement.
The inventory increase was primarily the result of higher manufactured product
and Tamoxifen inventory to support increased sales. Accounts payable increased
as a result of higher Tamoxifen inventory levels.
In fiscal 1999, the Company anticipates increased working capital needs to
support an expected increase in sales of existing manufactured products and
Tamoxifen.
25
<PAGE> 5
During fiscal 1998, the Company invested $20,431 in capital assets, primarily in
connection with the expansion of its manufacturing capacity in the Virginia and
New York facilities. This represents a decline from fiscal 1997 levels, as
expected, as the Company's Virginia facility came on-line. In fiscal 1999, the
Company estimates that it will invest an additional $17,000 in construction,
equipment and technology related items for its New York, New Jersey and Virginia
facilities. In addition, the Company had net purchases of marketable securities
of $11,360 that includes a strategic investment of $4,069 in Warner Chilcott
plc. Barr has the opportunity to increase its investment in Warner Chilcott
plc., through the exercise of warrants, which represents a potential use of cash
of $1,000 per year over the next three years (See Note 5 to the Consolidated
Financial Statements).
In November 1997, the Company refinanced its $14,400, 10.15% Senior Secured
Notes due June 28, 2001 with $30,000 of Senior Unsecured Notes with an average
interest rate of 6.88% per year. Annual principal payments under the Notes total
$1,429 through November 2002, $5,429 in 2003 and 2004 and $4,000 in 2005 through
2007 (See Note 6 to the Consolidated Financial Statements). Principal payments
on all outstanding long-term debt will be $1,967 in fiscal 1999. In addition,
the Company replaced its $10,000 Secured Revolving Credit facility with a
$20,000 Unsecured Revolving Credit facility. The Company currently maintains a
zero balance on the Revolver (at June 30, 1998, the outstanding balance was
$2,500).
In March 1998, the Company and its largest shareholder completed a combined
primary/secondary stock offering of 3,910,000 common shares. The Company sold
430,000 shares in this offering that provided funds of $14,521. The funds have
been used for general corporate purposes including expansion of working capital
and may be used for potential acquisitions of companies and/or selected products
that are complementary to the existing business.
The Company also continues to evaluate other growth opportunities including
additional strategic investments, acquisitions and joint ventures, which could
require significant capital resources.
The Company believes that cash flows from operations and existing borrowing
capacity under its Revolving Credit facility will be adequate to meet its
operational needs and to take advantage of strategic opportunities as they
occur. To the extent that additional capital resources are required, management
believes such capital may be raised by additional bank borrowings, equity
offerings or other means.
Environmental Matters
The Company has obligations for environmental safety and clean-up under various
state, local and federal laws, including the Comprehensive Environmental
Response, Compensation and Liability Act, commonly known as Superfund. Based on
information currently available, environmental expenditures have not had, and
are not anticipated to have, any material effect on the Company's consolidated
financial statements.
Effects on Inflation
Inflation has had only a minimal impact on the operations of the Company in
recent years.
26
<PAGE> 6
Year 2000
During 1998, the Company established a project team to assess the impact of the
Year 2000 issue on the Company's operations. The project team has developed a
multi-phase approach to assessing and resolving any Year 2000 issues. These
phases include:
1. Company-wide awareness of Year 2000 implications;
2. Assessment of the Company's information technology ("IT") and
non-IT systems, as well as, evaluation of third parties with
which the Company has a material relationship;
3. Implementation of compliant IT and non-IT systems including
contingency plans related to third parties which the Company
has a material relationship;
4. Testing/Validation of new and/or updated systems.
The Company's Year 2000 readiness program has identified several third parties
with which it has a material relationship. These third parties include certain
raw material suppliers, software providers and customers. The Company's Year
2000 project includes identifying these third parties and determining, based on
obtaining written verification, reviewing publicly available financial statement
disclosures and other means, that such third parties are either in compliance or
expect to be in compliance prior to January 1, 2000. However, there can be no
guarantee that the systems of these or other companies on which the Company
relies will be timely converted or that any such failure to convert by another
company would not have an adverse effect on the Company's systems and
operations.
All costs associated with the Year 2000 project to date have been expensed as
incurred. The Company will incur costs that include internal resources, external
consulting, software and certain equipment upgrades. All of the Company's
critical IT systems are Year 2000 compliant, including the financial,
manufacturing and laboratory information systems which were recently
implemented. The cost of the new hardware and software for the recent
implementations is not included in the Year 2000 costs, as the Company had
already planned to replace these systems and did not accelerate the replacement
due to Year 2000 issues. The Company is currently in the process of evaluating
the non-IT systems for compliance and will make modifications to these systems
as necessary. To date the Company has spent less than $100 in remediation
efforts and believes that the cost to gain company-wide compliance will not be
material.
To date the Company has not completed a formal contingency plan for
non-compliance, but continues to develop such plans based on the information
obtained from the third parties with which it has a material relationship and
the completion of the evaluation of its IT and non-IT systems.
The foregoing discussion regarding the Year 2000 project's timing,
effectiveness, implementation, and cost, contains forward-looking statements,
which are based on management's best estimates, derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
differ materially from those contemplated estimates. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties and
remediation success of the Company's customers and suppliers.
27
<PAGE> 7
New Accounting Pronouncement
In June 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." Both standards for the Company are
effective in fiscal 1999. SFAS No. 130 will require the Company to add the
reporting of comprehensive income to its financial statements. The Company
is currently evaluating the impact of SFAS No. 131 on its segment disclosures.
Forward Looking Statements
Except for the historical information contained herein, this Form 10-K,
including Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains forward-looking statements that involve a number
of risks and uncertainties including the timing and outcome of legal
proceedings, fluctuations in operating results, capital spending and other risks
detailed from time-to-time in the Company's filings with the Commission.
28
<PAGE> 8
BARR LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 72,956 $ 31,923
Marketable securities 7,320 --
Accounts receivable (including receivables from related parties of $1,015 in 1998
and $1,358 in 1997) less allowances of $2,738 and $1,620 in 1998 and 1997, respectively 46,760 32,732
Supply agreement receivable 14,667 2,500
Inventories 74,377 56,216
Deferred income taxes -- 2,203
Prepaid expenses 806 568
--------- ---------
Total current assets 216,886 126,142
Property, plant and equipment, net 90,649 75,928
Other assets 3,316 775
--------- ---------
Total assets $ 310,851 $ 202,845
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (including payables to a related party of $656 in 1998) $ 103,321 $ 72,685
Accrued liabilities 9,460 5,117
Deferred income taxes 1,000 --
Current portion of long-term debt 4,467 4,139
Income taxes payable 3,357 2,394
--------- ---------
Total current liabilities 121,605 84,335
Long-term debt 32,174 14,941
Other liabilities 162 201
Deferred income taxes 981 1,230
Commitments & Contingencies
Shareholders' equity
Preferred stock, $1 par value per share; authorized 2,000,000 shares; none
issued
Common stock $.01 par value per share; authorized 100,000,000;
issued 22,424,645 and 21,446,053, respectively 224 214
Additional paid-in capital 68,064 46,061
Retained earnings 88,596 55,876
Unrealized loss on investments (942) --
--------- ---------
155,942 102,151
Treasury stock at cost: 117,955 shares (13) (13)
--------- ---------
Total shareholders' equity 155,929 102,138
--------- ---------
Total liabilities and shareholders' equity $ 310,851 $ 202,845
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE> 9
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Net product sales (including sales
to related parties of $7,537, $4,971, and
$4,296 in 1998, 1997 and 1996, respectively) $ 346,638 $ 257,436 $ 232,224
Proceeds from supply agreements 30,666 27,050 --
--------- --------- ---------
Total revenues 377,304 284,486 232,224
Costs and expenses:
Cost of sales 266,002 217,196 189,394
Selling, general and administrative 38,990 23,391 21,695
Research and development 18,955 13,536 11,274
--------- --------- ---------
Earnings from operations 53,357 30,363 9,861
Interest income 2,176 2,398 2,778
Interest expense (858) (939) (1,767)
Other (expense) income (17) 228 637
--------- --------- ---------
Earnings before income taxes and extraordinary loss 54,658 32,050 11,509
Income tax expense 21,148 12,603 4,368
--------- --------- ---------
Earnings before extraordinary loss 33,510 19,447 7,141
Extraordinary loss on early extinguishment of debt, net of taxes (790) -- (125)
--------- --------- ---------
Net earnings $ 32,720 $ 19,447 $ 7,016
========= ========= =========
EARNINGS PER COMMON SHARE:
Earnings before extraordinary loss $ 1.54 $ 0.92 $ 0.34
Net earnings $ 1.50 $ 0.92 $ 0.33
========= ========= =========
EARNINGS PER COMMON SHARE-ASSUMING DILUTION:
Earnings before extraordinary loss $ 1.45 $ 0.87 $ 0.33
Net earnings $ 1.41 $ 0.87 $ 0.32
========= ========= =========
Weighted average shares 21,811 21,133 20,968
========= ========= =========
Weighted average shares-assuming dilution 23,190 22,430 21,757
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE> 10
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common Stock Additional Unrealized loss
---------------------------- paid-in Retained on marketable
Shares Amount capital Earnings securities
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 9,334,852 $ 93 $ 42,230 $ 29,543 $ --
Net earnings 7,016
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 80,757 1 1,310
Stock split (3-for-2) 4,700,055 47 (14) (52)
--------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 14,115,664 141 43,526 36,507 --
Net earnings 19,447
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 220,526 2 2,549 --
Stock split (3-for-2) 7,109,863 71 (14) (78)
--------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 21,446,053 214 46,061 55,876 --
Net earnings 32,720
Issuance of common
stock for stock offering 430,000 4 14,517
Stock issuance costs (353)
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 548,592 6 7,839
Unrealized loss on marketable
securities (942)
--------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 22,424,645 $ 224 $ 68,064 $ 88,596 $ (942)
--------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Common stock
in treasury Total
---------------------- Shareholders'
Shares Amount Equity
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, JUNE 30, 1995 52,425 $ (13) $ 71,853
Net earnings 7,016
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 1,311
Stock split (3-for-2) 26,212 -- (19)
- -----------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 78,637 (13) 80,161
Net earnings 19,447
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 2,551
Stock split (3-for-2) 39,318 -- (21)
- -----------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 117,955 (13) 102,138
Net earnings 32,720
Issuance of common
stock for stock offering 14,521
Stock issuance costs (353)
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 7,845
Unrealized loss on marketable
securities (942)
- -----------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 117,955 $ (13) $ 155,929
- -----------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
31
<PAGE> 11
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS OF DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net earnings $ 32,720 $ 19,447 $ 7,016
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 5,521 4,989 4,920
Deferred income tax expense 3,585 474 777
Write-off of deferred financing fees associated with early
extinguishment of debt 195 -- 31
Loss (gain) on disposal of property, plant and equipment 63 (203) 63
Gain on sale of marketable securities (2) -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and supply agreement receivable, net (26,195) (3,167) (4,758)
Inventories (18,161) (13,820) (6,506)
Prepaid expenses (238) 80 30
Other assets (389) (194) (107)
Increase (decrease) in:
Accounts payable, accrued liabilities and other 34,940 12,896 4,047
Income taxes payable 963 1,290 (145)
-------- -------- --------
Net cash provided by operating activities 33,002 21,792 5,368
-------- -------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of property, plant and equipment (20,431) (35,087) (16,048)
Proceeds from sale of property, plant and equipment 248 239 184
Purchases of marketable securities (11,960) -- --
Proceeds from sale of marketable securities 600 -- --
-------- -------- --------
Net cash used in investing activities (31,543) (34,848) (15,864)
-------- -------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Principal payments on long-term debt (14,939) (4,081) (2,043)
Proceeds from loans 30,000 1,637 3,153
Proceeds from revolving line of credit 16,800 -- --
Payments on revolving line of credit (14,300) -- --
Stock issuance costs (353) -- --
Proceeds from stock offering 14,521 -- --
Fees associated with stock split -- (21) (19)
Proceeds from exercise of stock options and employee stock purchases 7,845 2,551 1,311
-------- -------- --------
Net cash provided by financing activities 39,574 86 2,402
-------- -------- --------
Increase (decrease) in cash and cash equivalents 41,033 (12,970) (8,094)
Cash and cash equivalents, beginning of year 31,923 44,893 52,987
-------- -------- --------
Cash and cash equivalents, end of year $ 72,956 $ 31,923 $ 44,893
======== ======== ========
Supplemental cash flow data-Cash paid during the year:
Interest, net of portion capitalized $ 855 $ 930 $ 1,727
Income taxes 13,254 10,830 3,930
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE> 12
BARR LABORATORIES, INC.
Notes to the Consolidated Financial Statements
(in thousands of dollars, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation and Other Matters
The consolidated financial statements include the accounts of
Barr Laboratories, Inc. (the "Company") and its wholly-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Sherman Delaware, Inc. owned 44.2% of the common stock of the
Company at June 30, 1998. Dr. Bernard C. Sherman is a
principal stockholder of Sherman Delaware, Inc. and a Director
of Barr Laboratories, Inc.
(b) Credit and Market Risk
The Company operates in one industry segment; it manufactures,
markets and distributes a wide range of generic pharmaceutical
products. The Company also distributes a patented breast
cancer agent, Tamoxifen Citrate, under an agreement with the
Innovator. The Company's manufacturing plants are located in
New Jersey, New York and Virginia and its products are sold
throughout the United States and Puerto Rico, primarily to
wholesale and retail distributors. In addition, the Company
manufactures and sells certain products to other companies
that resell these pharmaceuticals under their own (private)
label. In fiscal 1998, 1997 and 1996, McKesson Drug Company
accounted for approximately 12%, 13% and 10% of net product
sales, respectively. No other customer accounted for greater
than 10% of sales in any of the last three fiscal years. The
Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral from
its customers.
(c) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid
investments (primarily market auction securities with interest
rates that are re-set in intervals of 7 to 49 days) which are
readily convertible into cash at par value (cost). As of June
30, 1998 and 1997, $59,321 and $11,239, respectively, of the
Company's cash was held in an interest bearing escrow account.
Such amounts represent the portion of the Company's payable
balance with the Innovator of Tamoxifen, which the Company has
decided to secure in connection with its cash management
policy.
In December 1995, the Company and the Innovator of Tamoxifen
entered into an Alternative Collateral Agreement ("Collateral
Agreement") which suspends certain sections of the Supply and
Distribution Agreement ("Distribution Agreement") entered into
by both parties in March 1993. Under the Collateral Agreement,
extensions of credit to the Company are no longer required to
be secured by a letter of credit or cash collateral. However,
the Company may at its
33
<PAGE> 13
discretion maintain a balance in the escrow account based on
its short-term cash requirements. All remaining terms of the
Distribution Agreement remain in place. In return for the
elimination of the cash collateral requirement and in lieu of
issuing letters of credit, the Company has agreed to pay the
Innovator monthly interest based on the average unsecured
monthly Tamoxifen payable balance, as defined in the
Collateral Agreement, and maintain compliance with certain
financial covenants. The Company was in compliance with such
covenants at June 30, 1998.
(d) Inventories
Inventories are stated at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market.
(e) Property, Plant and Equipment
Property, plant and equipment is recorded at cost.
Depreciation is provided for on a straight-line basis over the
estimated useful lives of the related assets. Leasehold
improvements are amortized on a straight-line basis over the
shorter of their useful lives or the terms of the respective
leases.
The estimated useful lives of the major classification of
depreciable assets are:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings 45
Building Improvements 10
Machinery and Equipment 3-10
Leasehold Improvements 3-10
Automobiles and Trucks 3-5
</TABLE>
Maintenance and repairs are charged to operations as incurred;
renewals and betterments are capitalized.
(f) Research and Development
Research and development costs, which consist principally of
product development costs, are charged to operations as
incurred.
(g) Earnings Per Share
On April 11, 1997, the Company's Board of Directors declared a
3-for-2 stock split effected in the form of a 50% stock
dividend. Approximately 7.1 million additional shares of
common stock were distributed on May 7, 1997 to shareholder's
of record as of April 24, 1997. On February 21, 1996, the
Company's Board of Directors declared a 3-for-2 stock split
effected in the form of a 50% stock dividend. Approximately
4.7 million additional shares of common stock were distributed
on March 25, 1996 to shareholder's of record as of March 4,
1996. All prior year share and per share amounts have been
adjusted for the stock splits.
34
<PAGE> 14
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share." SFAS No. 128 specifies the
computation, presentation and disclosure requirements for
earnings per share ("EPS") and became effective for both
interim and annual periods ending after December 15, 1997. All
prior period EPS data has been restated to conform with the
provisions of SFAS No. 128. The following is a reconciliation
of the numerators and denominators used to calculate Earnings
per common share before extraordinary loss on the Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Earnings per common share:
Earnings before extraordinary loss (numerator) $33,510 $19,447 $ 7,141
Weighted average shares (denominator) 21,811 21,133 20,968
Earnings before extraordinary loss $ 1.54 $ 0.92 $ 0.34
======= ======= =======
Earnings per common share - assuming dilution:
Earnings before extraordinary loss (numerator) $33,510 $19,447 $ 7,141
Weighted average shares 21,811 21,133 20,968
Effect of dilutive options 1,379 1,297 789
------- ------- -------
Weighted averages shares - assuming dilution (denominator) 23,190 22,430 21,757
Earnings before extraordinary loss $ 1.45 $ 0.87 $ 0.33
======= ======= =======
</TABLE>
(share amounts in thousands)
(h) Deferred Financing Fees
All costs associated with the issuance of debt are being
amortized on a straight-line basis over the life of the
related debt, which matures in 2002, 2004 and 2007. The
unamortized amounts of $398 and $492 at June 30, 1998 and
1997, respectively, are included in Other Assets in the
Consolidated Balance Sheets.
In connection with the November 1997 early extinguishment of
the remaining $14,400 of the 10.15% Senior Secured Notes, the
Company wrote off $195 in deferred financing fees in the year
ended June 30, 1998 (See Note 6 to the Consolidated Financial
Statements).
(i) Fair Value of Financial Instruments
Cash, Accounts Receivable and Accounts Payable - The carrying
amounts of these items are a reasonable estimate of their fair
value.
35
<PAGE> 15
Marketable Securities - Marketable securities are recorded at
their fair value (See Note 5 to the Consolidated Financial
Statements).
Long-Term Debt - The fair value at June 30, 1998 and 1997 is
estimated at $34 million and $20 million, respectively.
Estimates were determined by discounting the future cash flows
using rates currently available to the Company.
The fair value estimates presented herein are based on
pertinent information available to management as of June 30,
1998. Although management is not aware of any factors that
would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for
purposes of these financial statements since that date, and
current estimates of fair value may differ significantly from
the amounts presented herein.
(j) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and use assumptions that affect certain
reported amounts and disclosures; actual results may differ.
(k) Revenue Recognition
The Company recognizes revenue when goods are shipped.
(l) Stock-Based Compensation
Effective January 1, 1996, the Financial Accounting Standards
Board issued SFAS No. 123 "Accounting for Stock-Based
Compensation." SFAS No. 123 requires the Company to either
record compensation expense or provide additional disclosures
with respect to stock awards and stock option grants made
after December 31, 1994. These Notes to the Consolidated
Financial Statements include the disclosures required by SFAS
No. 123 (See Note 9). No compensation expense is recognized
pursuant to the Company's stock option plans under SFAS No.
123 which is consistent with prior treatment under Accounting
Principles Board Opinion No. 25 ("APB No. 25") "Accounting for
Stock Issued to Employees."
(2) PROCEEDS FROM SUPPLY AGREEMENTS
In January 1997, Bayer AG and Bayer Corporation ("Bayer") and the
Company reached an agreement to settle the then pending litigation
regarding Bayer's patent protecting Ciprofloxacin hydrochloride
("Settlement Agreement"). In connection with the Settlement Agreement,
the Company acknowledged the validity and enforceability of Bayer's
world-wide Ciprofloxacin patent, received an initial cash payment of
$24,550, and signed a contingent, non-exclusive Supply Agreement
("Supply Agreement") which ends at patent expiry in December 2003. For
the year ended June 30, 1997 the Company recognized revenue of $27,050
from this Supply Agreement including the initial cash payment of
$24,550.
36
<PAGE> 16
In accordance with the Supply Agreement, the Company recognizes income
and a related receivable on a monthly basis, as certain contingencies
are met. Collection of certain of these receivables occurs quarterly.
The Company recognized revenue of $26,166 for the year ended June 30,
1998. The Company received payments of $7,500 and $6,500 in March and
June 1998, respectively, for amounts earned for June through November
1997.
Also included in Proceeds from supply agreements is $4,500 received
under a separate contingent supply agreement with an unrelated party
relating to the Ciprofloxacin patent challenge.
(3) INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
June 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Raw Materials and Supplies $17,459 $21,403
Work-in-Process 4,132 3,340
Finished Goods 52,786 31,473
------- -------
$74,377 $56,216
======= =======
</TABLE>
Tamoxifen Citrate, purchased as a finished product, accounted for
$40,777 and $23,155 of finished goods inventory at June 30, 1998 and
1997, respectively.
(4) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
<TABLE>
<CAPTION>
June 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Land $ 3,257 $ 2,338
Buildings and Improvements 48,950 23,653
Machinery and Equipment 56,550 40,209
Leasehold Improvements 1,858 1,841
Automobiles and Trucks 68 68
Construction in Progress 18,380 41,686
-------- --------
129,063 109,795
Less: Accumulated
Depreciation & Amortization 38,414 33,867
-------- --------
$ 90,649 $ 75,928
======== ========
</TABLE>
For the years ended June 30, 1998, 1997 and 1996, $2,047, $1,801 and
$526 of interest was capitalized, respectively.
37
<PAGE> 17
(5) MARKETABLE SECURITIES & OTHER ASSETS
The Company accounts for investments in marketable securities in
accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company's investments are classified
as "available for sale" and, accordingly, are recorded at current
market value with offsetting adjustments to shareholders' equity, net
of income taxes.
Marketable securities include investments in a short duration portfolio
of corporate and government debt. The debt securities will be held for
less than one year and are therefore, recorded as a Current Asset in
the Consolidated Balance Sheets.
On August 13, 1997 Barr made a strategic investment in Warner Chilcott
plc. ("Warner Chilcott"), a developer, marketer, and distributor of
specialty pharmaceutical products. In connection with Warner Chilcott's
Initial Public Offering ("Offering"), the Company acquired 250,000
Ordinary Shares represented by 250,000 American Depository Shares
("ADSs") at a price equal to the initial public offering price less
underwriting discounts and commissions. The initial investment totaled
$4,069. In addition, the Company was granted warrants to purchase an
additional 250,000 shares in the form of ADSs. Beginning on the first
anniversary of the Offering and annually thereafter for the next three
years, one-fourth of the warrants will be exercisable by Barr. If Barr
does not exercise in full the portion of the warrant exercisable during
any one year, such portion of the warrant will terminate. The Company
elected not to exercise the first portion of the warrants, and as a
result, such portion of the warrants terminated on August 13, 1998.
Finally, in connection with two product agreements tentatively agreed
to with Warner Chilcott, the Company has the opportunity to receive an
additional 425,000 shares upon receipt of certain product approvals by
Barr. The equity investment in Warner Chilcott is recorded in Other
Assets in the Consolidated Balance Sheets.
The amortized cost and estimated market values of the securities at
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government Securities $ 4,930 $ 35 $ 6 $ 4,959
Corporate Bonds 2,363 -- 2 2,361
------- ------- ------- -------
Total debt securities 7,293 35 8 7,320
Equity securities 4,069 -- 1,600 2,469
------- ------- ------- -------
Total securities $11,362 $ 35 $ 1,608 $ 9,789
======= ======= ======= =======
</TABLE>
Proceeds of $600, which include a gain of $2, were received on the
sales of marketable securities in 1998. The cost of investments sold is
determined by the specific identification method.
38
<PAGE> 18
(6) LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
June 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
New Jersey Economic Development
Authority Bond (a) $ 285 $ 328
10.15% Senior Secured Notes Due
June 28, 2001(b) -- 14,400
Senior Unsecured Notes (b) 30,000 --
Equipment Financing (c) 3,856 4,352
Unsecured Revolving Credit Facility (d) 2,500 --
------ --------
36,641 19,080
Less: Current Installments of Long-Term
Debt 4,467 4,139
------- -------
Total Long-Term Debt $32,174 $14,941
======= =======
</TABLE>
(a) The New Jersey Economic Development Authority Bond is payable
to a bank. Such loan is secured by a first mortgage on land,
building and improvements on the facility located at 265
Livingston Street. Interest is charged at 75% of the bank's
prime rate. The prime rate was 8.5% at June 30, 1998 and 1997.
Monthly installments are $3.6 plus interest, through December
1999. Upon maturity in January 2000, there will be a final
installment equal to the then remaining principal balance of
$220.
(b) In June 1991, the Company entered into a note purchase
agreement and issued $20,000 of Senior Secured Notes bearing
interest at a rate of 10.15%, payable semiannually. In March
1996, the Company negotiated the prepayment of $2,000 of these
Notes. The cash payment of $2,213 included a prepayment
penalty of $169 and accrued interest through March 15, 1996 of
$44. The prepayment penalty of $169 and the related write-off
of approximately $31 in previously deferred financing costs
resulted in an extraordinary loss, which net of taxes of $76,
was $125 or $0.01 per share. The Company began making annual
principal payments of $3,600 in June 1997. These notes were
collateralized by a first mortgage on the Pomona, New York
facility and all machinery and equipment other than machinery
and equipment in the Forest, Virginia facility.
In November 1997, the Company refinanced the outstanding
$14,400 Senior Secured Notes with $30,000 of Senior Unsecured
Notes with an average interest rate of 6.88% per year. The
cash payment of $16,055 included the outstanding principal of
$14,400, a prepayment penalty of $1,087 and accrued interest
through November 18, 1997 of $568. The prepayment penalty of
$1,087 and the related write-off of approximately $195 in
previously deferred financing costs resulted in an
extraordinary loss. This extraordinary loss from early
extinguishment of debt, net of taxes of $492, was $790 or
$0.04 per share. The new Senior Unsecured Notes of $30,000
include a $20,000, 7.01% Note due November 18, 2007 and
$10,000, 6.61% Notes due November 18, 2004. Annual principal
payments under the Notes total $1,429 through November 2002,
$5,429 in 2003 and 2004 and $4,000 in 2005 through 2007.
39
<PAGE> 19
The Senior Unsecured Notes contain certain financial covenants
including restrictions on dividend payments not to exceed $10
million plus 75% of consolidated net income subsequent to June
30, 1997. The Company was in compliance with all such
covenants as of June 30, 1998.
(c) In April 1996, the Company signed a Loan and Security
Agreement with BankAmerica Leasing and Capital Group that
provided the Company up to $18,750 in financing for equipment
to be purchased through October 1997. Notes entered into under
this agreement require no principal payment for the first two
quarters; bear interest quarterly at a rate equal to the
London Interbank Offer Rate (LIBOR) plus 125 basis points; and
have a term of 72 months. LIBOR was 5.719% and 5.813% at June
30, 1998 and June 30, 1997, respectively. In November 1997,
the Company opted not to renew this facility.
(d) In November 1997, the Company replaced its $10,000 Secured
Revolving Credit Facility with Bank of America National Trust
and Savings Association with a $20,000 Unsecured Revolving
Credit Facility ("Revolver"). In addition, the term of the
Revolver was extended one year to July 31, 2000. Borrowings
under this facility bear interest at either prime or LIBOR
plus 0.75%. In addition, the Company is required to pay a
commitment fee equal to .25% of the difference between the
outstanding borrowings and $20,000.
Principal maturities of existing long-term debt for the next five years
and thereafter are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30,
--------
<S> <C>
1999 $4,467
2000 2,166
2001 1,924
2002 3,184
2003 2,043
Thereafter 22,857
</TABLE>
(7) RELATED-PARTY TRANSACTIONS
The Company's related party transactions were with affiliated companies
of Dr. Bernard C. Sherman. During the years ended June 30, 1998, 1997,
and 1996, the Company purchased $1,799, $1,800 and $1,800,
respectively, of bulk pharmaceutical material from such companies. In
addition, the Company sold certain of its pharmaceutical products and
bulk pharmaceutical materials to five other companies owned by Dr.
Bernard Sherman. During fiscal 1996, the Company also entered into a
multi-year agreement with a Company owned by Dr. Sherman to share
litigation costs in connection with one of its patent challenges. For
the years ended June 30, 1998, 1997 and 1996, the Company received
$1,170, $987 and $570, respectively, in connection with such agreement
which was recorded as a reduction to selling, general and
administrative expenses.
40
<PAGE> 20
During the years ended June 30, 1998, 1997 and 1996, the Company's
founder and Vice Chairman, Edwin A. Cohen, earned $250, $250 and $213,
respectively, under a consulting agreement.
(8) Income Taxes
A summary of the components of income tax expense is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $15,504 $10,757 $ 3,110
State 1,567 1,372 405
------- ------- -------
17,071 12,129 3,515
------- ------- -------
Deferred:
Federal 3,103 294 617
State 482 180 160
------- ------- -------
3,585 474 777
======= ======= =======
Total $20,656 $12,603 $ 4,292
======= ======= =======
</TABLE>
Income tax expense for the years ended June 30, 1998, 1997 and 1996 is
included in the financial statements as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Continuing operations $ 21,148 $ 12,603 $ 4,368
Extraordinary loss on early
extinguishment of debt (492) -- (76)
-------- -------- --------
$ 20,656 $ 12,603 $ 4,292
======== ======== ========
</TABLE>
The provision for income taxes differs from amounts computed by
applying the statutory federal income tax rate to income before taxes
due to the following:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Federal Income Taxes at Statutory
Rate $ 18,681 $ 11,214 $ 3,958
State Income Taxes,
Net of Federal Income Tax Effect 1,332 1,070 360
Other, net 643 319 (26)
-------- -------- -------
$ 20,656 $ 12,603 $ 4,292
======== ======== =======
</TABLE>
41
<PAGE> 21
The temporary differences that give rise to deferred tax assets and liabilities
as of June 30, 1998 and 1997 are as follows;
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred Tax Assets:
Receivable Reserves $ 1,152 $ 561
Inventory Reserves 1,589 990
Inventory Capitalization 208 706
Investments 631 --
Other Operating Reserves 1,934 903
------- -------
Total Deferred Tax Assets 5,514 3,160
Deferred Tax Liabilities:
Plant and Equipment (1,612) (1,230)
Proceeds from Supply
Agreement (5,883) (957)
------- -------
Total Deferred Tax
Liabilities (7,495) (2,187)
------- -------
Net Deferred Tax (Liability)/Asset $(1,981) $ 973
======= =======
</TABLE>
Internal Revenue Service ("IRS")
As of June 30, 1998, the U.S. Internal Revenue Service has completed
its examination of the Company's tax returns for all years through 1992
and there are no unresolved issues outstanding for those years.
(9) SHAREHOLDERS' EQUITY
Employee Stock Option Plans
The Company has stock option plans, which were approved by the
shareholders and which authorize the granting of options to officers
and certain key employees to purchase the Company's common stock at a
price equal to the market price on the date of grant.
During fiscal 1994, the shareholders ratified the adoption by the Board
of Directors of the 1993 Stock Incentive Plan ("the 1993 Option Plan").
In December 1996, the shareholders ratified an amendment to the 1993
Option Plan which increased the number of shares of common stock which
may be granted by 1,125,000 to a total of 2,812,500 (after giving
effect to the May 1997 3-for-2 stock split).
The Company's other option plan was approved by the shareholders in
1986 ("the 1986 Option Plan"). Effective June 30, 1996, options are no
longer granted under this Plan. For fiscal 1998 and 1997, there were no
options that expired under this plan. In fiscal 1996, 64,165 options
expired.
All options granted prior to June 30, 1996, under the 1993 Option Plan
and 1986 Option Plan, are exercisable between one and two years from
the date of grant and expire ten
42
<PAGE> 22
years after the date of grant except in cases of death or termination
of employment as defined in each Plan. Options issued after June 30,
1996 are exercisable between one and three years from the date of
grant. To date, no option has been granted under either the 1993 Option
Plan or the 1986 Option Plan at a price below the current market price
of the Company's common stock on the date of grant.
A summary of the activity resulting from all plans, adjusted for the
March 1996 and May 1997 3-for-2 stock splits, is as follows:
<TABLE>
<CAPTION>
NO. OF SHARES OPTION PRICE
------------- ------------
<S> <C> <C>
Outstanding at 6/30/95 1,424,806 $1.94-11.24
Granted 573,741 10.52-10.64
Canceled (50,062) 2.83-10.52
Exercised (110,437) 2.44-10.83
----------
Outstanding at 6/30/96 1,838,048 1.94-11.24
Granted 330,406 17.54-37.38
Canceled (1,125) 10.52
Exercised (181,938) 1.94-10.94
----------
Outstanding at 6/30/97 1,985,391 1.94-37.38
Granted 195,500 34.66-39.66
Canceled (38,992) 19.29-39.66
Exercised (467,411) 1.94-19.29
----------
Outstanding at 6/30/98 1,674,488 $1.94-39.66
----------
Exercised to date through 6/30/98 1,331,806
Available for Grant (4,162,500 authorized) 1,092,041
Exercisable at 6/30/98 1,276,627 $1.94-22.12
</TABLE>
Non-Employee Directors' Stock Option Plan
During fiscal year 1994, the shareholders ratified the adoption by the
Board of Directors of the 1993 Stock Option Plan for Non-Employee
Directors (the "Directors' Plan"). An aggregate of 337,500 shares of
common stock were authorized to be granted under the Directors' Plan.
In December 1996, the shareholders ratified an amendment to the
43
<PAGE> 23
Directors' Plan that increased the number of shares of common stock
that may be granted by 225,000 to a total of 562,500. This formula
plan, among other things, enhances the Company's ability to attract and
retain experienced directors. In December 1995, the number of shares
which each non-employee director is optioned was increased from 6,750
to 11,250 shares on the grant date, except in the case of the first
grant date (which was the date of the 1993 Annual Meeting) where each
eligible director was optioned 27,000 shares.
All options granted under the Directors' Plan have ten-year terms and
are exercisable at an option exercise price equal to the market price
of common stock on the date of grant. Each option is exercisable on the
date of the first annual shareholders' meeting immediately following
the date of grant of the option, provided there has been no
interruption of the optionee's service on the Board before that date.
The following is a summary of activity, adjusted for the March 1996 and
May 1997 3-for-2 stock splits, for the three fiscal years ended June
30, 1998:
<TABLE>
<CAPTION>
No. of Shares Option Price
------------- ------------
<S> <C> <C>
Outstanding at 6/30/95 148,500 $9.16-11.38
Granted 67,500 10.33
---------------
Outstanding at 6/30/96 216,000 9.16-11.38
Granted 67,500 17.25
Exercised (40,000) 9.16
---------------
Outstanding at 6/30/97 243,500 9.16-17.25
Granted 67,500 36.00
Canceled (11,250) 36.00
Exercised (38,000) 9.16-11.38
---------------
Outstanding at 6/30/98 261,750 9.16-36.00
---------------
Available for Grant
(562,500 authorized) 222,750
---------------
Exercisable at 6/30/98 205,500 $9.16-17.25
---------------
</TABLE>
Employee Stock Purchase Plan
During fiscal 1994, the shareholders ratified the adoption by the Board
of Directors of the 1993 Employee Stock Purchase Plan (the "Purchase
Plan") to offer employees an inducement to acquire an ownership
interest in the Company. The Purchase Plan permits eligible
44
<PAGE> 24
employees to purchase, through regular payroll deductions, an aggregate
of 450,000 shares of common stock at approximately 85% of the fair
market value of such shares. Under the Plan, purchases were 43,181,
50,916 and 59,977 for the years ended June 30, 1998, 1997 and 1996,
respectively.
The Company applies APB No. 25 and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no
compensation cost has been recognized for its stock option plans and
its stock purchase plan. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the
method of SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income As reported $ 32,720 $ 19,447 $ 7,016
Pro forma $ 31,539 $ 18,120 $ 6,637
Net earnings per share As reported $ 1.50 $ 0.92 $ 0.33
Pro forma $ 1.45 $ 0.86 $ 0.32
Net earnings per share- As reported $ 1.41 $ 0.87 $ 0.32
assuming dilution Pro forma $ 1.36 $ 0.81 $ 0.31
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions for 1996, 1997 and 1998, respectively: dividend yield of
0%; expected volatility of 38.5%, 42.6% and 42.1%; weighted-average
risk-free interest rates of 5.8%, 6.3% and 5.9%; and expected option
life of 3 years for the 1993 Option Plan and 4 years for the Directors'
Plan.
The following table summarizes information about stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------
Weighted
Range of Number Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at 6/30/98 Contractual Life Exercise Price at 6/30/98 Exercise Price
------ ---------- ---------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$1.94 - 6.00 372,981 4.4 years $4.56 353,856 $4.53
7.55 - 11.38 968,250 6.3 years 9.90 968,250 9.90
17.25 - 19.29 346,757 8.3 years 18.77 158,521 18.33
22.12 - 39.66 248,250 9.3 years 38.45 1,500 22.12
------------ ----------
1,936,238 1,482,127
============ ==========
</TABLE>
(10) SAVINGS AND RETIREMENT PLAN
The Company has a savings and retirement plan (the "401(k) Plan") which
is intended to qualify under Section 401(k) of the Internal Revenue
Code. Employees are eligible to participate in the 401(k) Plan in the
first month following the month of hire. Participating
45
<PAGE> 25
employees may contribute up to a maximum of 12% of their earnings
before or after taxes. The Company is required, pursuant to the terms
of its union contract, to contribute to each union employee's account
an amount equal to the 2% minimum contribution made by such employee.
The Company may, at its discretion, contribute a percentage of the
amount contributed by an employee to the 401(k) Plan up to a maximum of
10% of such employee's compensation. Participants are always fully
vested with respect to their own salary and cash contributions and any
profits arising therefrom. Participants become vested with respect to
20% of the Company's contributions to their accounts and any profits
arising therefrom for each full year of employment with the Company and
thus become fully vested after five full years of employment.
The Company's contributions to the 401(k) Plan were $2,194, $1,745 and
$1,488, for the years ended June 30, 1998, 1997 and 1996, respectively.
(11) OTHER (EXPENSE) INCOME
A summary of other (expense) income is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net (Loss) Gain on Sale of Property,
Plant and Equipment $ (63) $ 203 $ (63)
Joint Venture Litigation (a) -- -- 694
Other 46 25 6
----- ----- -----
Other (Expense) Income $ (17) $ 228 $ 637
===== ===== =====
</TABLE>
(a) In May 1996, the Company and an affiliated company reached an
agreement with a former partner in a joint venture and
received on June 10, 1996, $694 of a $1,000 deposit which was
paid in escrow in furtherance of the possible joint venture.
The Company had previously written off the $1,000 investment
in the fourth quarter of fiscal 1992.
(12) COMMITMENTS AND CONTINGENCIES
The Company is party to various operating leases which relate to the
rental of office and plant facilities and of equipment. The Company is
satisfied with its ability to extend such leases, if necessary. Rent
expense charged to operations was $1,493, $1,314 and $1,126 in 1998,
1997 and 1996, respectively. Future minimum rental payments, exclusive
of taxes, insurance and other costs under noncancellable long-term
operating lease commitments, are as follows:
<TABLE>
<CAPTION>
Minimum
Year Ending Rental
June 30, Payments
-------- --------
<S> <C> <C>
1999 $942
2000 199
2001 83
</TABLE>
46
<PAGE> 26
Product Liability
The Company maintains product liability insurance coverage in the
amount of $20,000. No significant product liability suit has ever been
filed against the Company, however, if one were filed and such a case
were successful against the Company, it could have a material adverse
effect upon the business and financial condition of the Company to the
extent such judgment was not covered by insurance or exceeded the
policy limits.
Invamed, Inc. Lawsuit
On February 25, 1998, Invamed, Inc. ("Invamed") named the Company and
several others as defendants in a lawsuit filed in the United States
District Court for the Southern District of New York, charging that the
Company unlawfully blocked access to the raw material source for
Warfarin Sodium. The Company believes that the suit filed against it by
Invamed is without merit and intends to defend its position vigorously.
This action is currently in discovery stage. It is anticipated that
this matter will take several years to be resolved but an adverse
judgement could have a material adverse impact on the Company's
consolidated financial statements.
DuPont Anti-Trust Suit
On March 9, 1998, the Company filed an anti-trust suit against DuPont
Merck Pharmaceutical Company ("DuPont Merck") in the United States
District Court for the Southern District of New York, charging that
DuPont Merck has acted unlawfully to impede the marketplace acceptance
of Barr's generic version of the anti-coagulant Coumadin. The Company's
suit charges that DuPont Merck's actions violated federal anti-trust
laws, as well as the Lanham Act and the New York Deceptive Acts and
Practices Act. The Company intends to prosecute this case vigorously.
Other Litigation
As of June 1998, the Company was involved with other lawsuits
incidental to its business, including patent infringement actions.
Management of the Company, based on the advice of legal counsel,
believes that the ultimate disposition of such other lawsuits will not
have any significant adverse effect on the Company's consolidated
financial statements.
(13) FOURTH QUARTER CHARGE
During the quarter ended June 30, 1998, the Company recorded a $1.2
million restructuring charge which is included in Selling, General and
Administrative Expenses in the Consolidated Statements of Operations.
Approximately half of this charge relates to the write-off of equipment
and leasehold improvements in connection with the closing of a leased
New Jersey packaging facility, for which the operations have been
relocated to other company facilities. The remainder relates to
severance related expenses for certain operations employees, primarily
those affiliated with the facility to be closed. As of June 30, 1998,
none of the charge has been utilized and it is anticipated that the
liability will be expended during the quarter ending September 30,
1998.
47
<PAGE> 27
(14) QUARTERLY DATA (UNAUDITED)
A summary of the quarterly results of operations is as follows:
<TABLE>
<CAPTION>
(in thousands of dollars, except per share amounts)
Three Month Period Ended
------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Year 1998:
Total revenues (1) $ 96,267 $ 92,328 $ 96,387 $ 92,322
Cost of sales 65,226 68,769 70,042 61,965
Earnings before extraordinary loss on early
extinguishment of debt 10,397 7,115 7,151 8,847
Net earnings 10,397 6,325 7,151 8,847
Earnings per common share - assuming dilution
Earnings before extraordinary loss on early
extinguishment of debt (2) $ 0.45 $ 0.31 $ 0.31 $ 0.38
=========== ========== =========== ==========
Net earnings (2) $ 0.45 $ 0.27 $ 0.31 $ 0.38
=========== ========== =========== ==========
Price Range of Common Stock (3)
High $ 49.00 $ 40.13 $ 41.75 $ 46.94
Low 37.00 32.50 33.25 37.81
Fiscal Year 1997:
Total revenues (4) $ 64,231 $ 67,335 $ 84,714 $ 68,206
Cost of sales 53,476 57,685 50,959 55,076
Net earnings 1,767 2,228 14,925 527
Earnings per common share - assuming dilution
Net earnings (2) $ 0.08 $ 0.10 $ 0.66 $ 0.02
=========== =========== ========== ==========
Price Range of Common Stock
High $ 20.00 $ 19.33 $ 28.00 $ 49.75
Low 14.75 16.83 16.42 24.38
</TABLE>
(1) Amounts include Proceeds from supply agreements of $7,166, $6,417,
$8,750 and $8,333 for the quarters ended September 30, 1997, December
31, 1997, March 31, 1998 and June 30, 1998, respectively.
(2) The sum of the individual quarters may not equal the full year amounts
due to the effects of the market prices in the application of the
treasury stock method. During its two most recent fiscal years, the
Company paid no cash dividend.
(3) The Company's common stock is listed and traded on the New York Stock
Exchange (BRL). At June 30, 1998, there were approximately 665 record
shareholders of common stock. The Company believes that a significant
number of beneficial owners hold their shares in street names.
(4) Amounts include Proceeds from supply agreement of $24,550 and $2,500
for the quarters ended March 31, 1997 and June 30, 1997, respectively.
48
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Barr Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Barr
Laboratories, Inc. and subsidiaries (the "Company") as of June 30, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Barr Laboratories, Inc. and
subsidiaries at June 30, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1998
in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
August 19, 1998
49
<PAGE> 29
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation and accuracy of the consolidated
financial statements and other information included in this report. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles using, where appropriate, management's
best estimates and judgments.
In meeting its responsibility for the reliability of the financial statements,
management has developed and relies on the Company's system of internal
accounting control. The system is designed to provide reasonable assurance that
assets are safeguarded and that transactions are executed as authorized and are
properly recorded.
The Board of Directors reviews the financial statements and reporting practices
of the Company through its Audit Committee, which is composed entirely of
directors who are not officers or employees of the Company. The committee meets
with the independent auditors and management to discuss audit scope and results
and also to consider internal control and financial reporting matters. The
independent auditors have direct unrestricted access to the Audit Committee. The
entire Board of Directors reviews the Company's financial performance and
financial plan.
/s/ Bruce L. Downey
Chairman of the Board, Chief Executive Officer and President
50
<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 377,304(1) $ 284,486(3) $ 232,224 $ 199,720 $ 109,133
Earnings before income taxes,
extraordinary loss and
cumulative effect of accounting
change 54,658 32,050 11,509 10,222 3,745
Income tax expense 21,148 12,603 4,368 3,852 1,461
Earnings before extraordinary loss
and cumulative effect of
accounting change 33,510 19,447 7,141 6,370 2,284
Net earnings 32,720(2) 19,447 7,016(4) 6,225(6) 2,658(7)
Earnings per common share:
Earnings before extraordinary
loss and cumulative effect of
accounting change 1.54 0.92 0.34(5) 0.32(5) 0.12(5)
Earnings per common share-
assuming dilution:
Earnings before extraordinary
loss and cumulative effect of
accounting change 1.45 0.87 0.33(5) 0.31(5) 0.11(5)
Net earnings 1.41(2) 0.87 0.32(4)(5) 0.30(5)(6) 0.13(5)(7)
BALANCE SHEET DATA 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Working capital $ 95,281 $ 41,807 $ 52,985 $ 58,364 $ 53,227
Total Assets 310,851 202,845 169,220 155,953 125,907
Long-term Debt(8) 32,174 14,941 17,709 20,371 30,433
Shareholders' Equity(9) 155,929 102,138 80,161 71,853 54,984
</TABLE>
(1) Includes $30,666 in Proceeds from supply agreements.
(2) Fiscal 1998 includes the effect of a $790 ($0.04 per share)
extraordinary loss (net of tax of $492) on early extinguishment of debt
(See Note 6 to the Consolidated Financial Statements).
(3) Includes $27,050 in Proceeds from supply agreement.
(4) Fiscal 1996 includes the effect of a $125 ($0.01 per share)
extraordinary loss (net of tax of $76) on early extinguishment of debt
(See Note 6 to the Consolidated Financial Statements).
(5) Amounts have been adjusted for the March 1996 and May 1997 3-for-2
stock splits effected in the form of 50% stock dividends.
(6) Fiscal 1995 includes the effect of a $145 ($0.01 per share)
extraordinary loss (net of tax of $92) on early extinguishment of debt.
(7) Includes the effect of a $374 ($0.02 per share) gain from the
cumulative effect of an accounting change.
(8) Excludes current installments (See Note 6 to the Consolidated Financial
Statements).
(9) The Company has not paid a cash dividend in any of the above years.
51
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Post-Effective Amendment to
Registration Statement No. 33-13901, and in Registration Statement Nos.
33-73696, 33-73698, 33-73700, 333-17349 and 333-17351 of Barr Laboratories, Inc.
on Form S-8 of our reports dated August 19, 1998, appearing in and incorporated
by reference in the Annual Report on Form 10-K of Barr Laboratories, Inc. for
the year ended June 30, 1998.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
September 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 72,956
<SECURITIES> 7,320
<RECEIVABLES> 61,427<F1>
<ALLOWANCES> 0
<INVENTORY> 74,377
<CURRENT-ASSETS> 216,886
<PP&E> 90,649<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 310,851
<CURRENT-LIABILITIES> 121,605
<BONDS> 36,641
0
0
<COMMON> 224
<OTHER-SE> 155,705
<TOTAL-LIABILITY-AND-EQUITY> 310,851
<SALES> 346,638
<TOTAL-REVENUES> 377,304
<CGS> 266,002
<TOTAL-COSTS> 323,947
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 858
<INCOME-PRETAX> 54,658
<INCOME-TAX> 21,148
<INCOME-CONTINUING> 33,510
<DISCONTINUED> 0
<EXTRAORDINARY> 790
<CHANGES> 0
<NET-INCOME> 32,720
<EPS-PRIMARY> 1.50<F2>
<EPS-DILUTED> 1.41
<FN>
<F1>Accounts receivable and PP&E are net.
<F2>Earnings per share are simple, not primary.
</FN>
</TABLE>
